How do I get money to start my business such as grants, bank loans, and money from SBA programs; what information do I have to provide, how much interest will I have to pay and how much personal capital injection and collateral will be required?
Contrary to ubiquitous advertising claims, government grants to start up conventional businesses are, essentially, non-existent. The U.S. Small Business Administration (SBA) puts it this way:
“At this time, Congress has not set aside any monies for grants to start and/or expand a small business. The U.S. Government does have grants that meet other purposes not related to business needs. The following website contains some of those resources: http://www.sba.gov/financing/basics/grants.html”
For those who believe their situation is unique or for other reasons want to pursue the possibility of a grant, there are a number of books on grants and grant writing available at the Evansville Vanderburgh Public Library in the “Business Central Collection” or view titles at www.evpl.org/researchdatabases. Also try www.allbusiness.com, query “business loans and grants”. Also try www.grants.gov.
There are a number of ways to finance a business which fall into three broad categories, equity financing, debt financing and personal financing.
Equity financing involves pledging title to a part of your business in exchange for cash. The most straightforward form of equity financing is the sale of stock by a corporation. Stockholders hold a share of the issuing company proportionate to the number of shares they buy of the total amount of company issued stock.
Another form of equity financing is venture capital. Businesses or individuals make funds available to finance companies in exchange for a percentage of the business. Usually, these transactions are in the millions of dollars, not a typical small business transaction, and involve exit strategies that ultimately take the company public (IPO’s). Google, “Venture Capital Firms”.
So-called “Angels” are another potential source of equity financing; Google, “investment angels”. Again, these are usually high dollar transactions.
Perhaps the most utilized method of equity funding is forming a partnership with others who have funds to invest and similar interests in operating a business.
Debt financing for most people is borrowing from their bank or other financial institution such as, Credit Unions, American General Financial Services or Heller Financial (now GE Capital). Obtaining a bank loan for a start up business requires stellar credit ratings, a business plan, preferably with a provable cash flow, (See Business Plan FAQ) and a minimum of 25%-30% capital injection on the part of the borrower. Interest rates currently vary from 7%-8%. Working capital loans for an on-going business may not require a business plan but will require strong financial statements. Interest on these loans is prime plus 1%-3% or, currently, 5%-7%. In order to apply for a loan, call your bank(s) of choice and ask for the commercial loan officer, make an appointment and prepare to pitch your business plan or working capital requirement story. All financial institution loans require collateral for more than the value of the loan and a personal guarantee from the borrower even if the business is a corporation or an LLC.
Contrary to popular opinion, The SBA does not make loans; they guarantee a portion of a loan that a lending institution makes to a borrower. One must be turned down for a regular bank loan before applying (through the bank) for an SBA guaranteed loan. The SBA may guarantee 50%-90% of the loan but the bank must be willing to assume the risk for the balance. You may have to apply to more than one bank before you are successful. The SBA does have a “Community Express Loan Program” working with either of two banks in California and Florida for maximum loans of $50,000 at rates of prime plus 4 1/2% to 4 3/4% or, currently 8%-8 1/2%. A Business Plan is required and must be vetted by one of our specially trained SCORE counselors.
Similar to the SBA, the Indiana Economic Development Corporation may guarantee loans for High Tech/Fast Track companies that need high dollar amounts ($1,000,000 or more), www.in.gov.iedc.
No matter the source of your desired funds, you will need to know the precise amount of money you need, be able to convincingly portray that it is the right amount, what it will be used for and how and when it will repaid.
The best way to finance a business is to use your own money. Money you have saved for the purpose of starting a business or saved money you subsequently decide to use for that purpose. That being said, there are few people who save to start a business so, other means of personal financing come into play:
- Home equity loans (puts your home at risk).
- Credit cards (a very expensive way to finance your business).
- Life insurance loans (if you’ve paid in enough for it to have value).
- Liens against your car, boat, motorcycle, tools, etc. or other collateral.
- Gifts or loans from family and friends (if you fail, Thanksgiving dinners can be awkward).
- Seller financing, if you are buying a business.
You are cautioned to use these methods of obtaining cash judiciously.
Your SCORE counselor has publications and other resources available to discuss help in getting a loan. Web sites,www.SCORE.org and www.sba.gov/financialassistance/ are very informative as well.